Commissioner of Taxation v Hornibrook - [2006] FCAFC 170 - FCAFC 2006 case summary — Zoe

CTHFCAFC

Commissioner of Taxation v Hornibrook

[2006] FCAFC 170

Federal Court of Australia (Full Court)|2006-11-28|Before: Young JJ, Gyles J

View original source

At a glance

Source facts

Court

Federal Court of Australia (Full Court)

Decision date

2006-11-28

Before

Young JJ, Gyles J

Source

Original judgment source is linked above.

Judgment (55 paragraphs)

[1]

REASONS FOR JUDGMENT GYLES J: 1 This appeal concerns the interplay between s 43 of the Administrative Appeals Tribunal Act 1975 (Cth) (the AAT Act) and the provisions of Pt IVC of the Taxation Administration Act 1953 (Cth) (the Administration Act) as they formerly stood in relation to the remission of additional or penalty tax. A reassessment of income tax by the Commissioner amended an assessment to include further income upon which further primary income tax was levied and additional (penalty) tax. The taxpayer, Reginald Hornibrook, objected to the reassessment insofar as the income component was concerned. The Commissioner of Taxation rejected the objection. The taxpayer appealed to the Administrative Appeals Tribunal (the Tribunal) against the imposition of further income tax. The Tribunal affirmed the decision in relation to the further income tax but, in relation to penalty, remitted the matter to the Commissioner with the direction that the assessment for that income year be amended by remitting additional tax in full (Re Applicant and Federal Commissioner of Taxation 2005 ATC 127; (2005) 58 ATR 1256). The Commissioner appealed to the Court pursuant to s 44 of the AAT Actchallenging that direction. The appeal was dismissed (Commissioner of Taxation v Hornibrook (2006) 42 AAR 136; 2006 ATC 4051; (2006) 61 ATR 573; [2006] FCA 9). The Commissioner appeals against that dismissal.

[2]

Background 2 In early 1989 the taxpayer received an assessment for income tax in relation to the year ended 30 June 1988 in the sum of $30,256.56. 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. 3 The starting point was that s 223 of the Income Tax Assessment Act 1936 (Cth) as it applied to the case (being that in force as at 30 June 1988) rendered a taxpayer, who had made a false or misleading statement or omitted material without which a statement would be misleading so that the tax properly payable exceeds the tax assessed on the false basis, liable to pay, by way of penalty, additional tax equal to double the amount of the excess. The Commissioner deemed s 223 to apply. That activated the duty to assess (s 227(1)) and a discretion to remit the additional tax in whole or part (s 227(3)). The form of the notice of amended assessment (so far as material) was as follows: 'Your Amended Taxable Income is $1270324 $ ˘ Tax on Taxable Income A 615309.76DR Medicare Levy O 15879.05DR Provisional Tax on 1988 Income + 12.0% B 16389.00DR Additional Tax for Incorrect Return D 586858.75DR Balance of this Assessment L 1234436.56DR Balance of your previous 1988 Assessment M 30256.56DR Difference between this and previous Assessment N 1204180.00DR This amount is payable by 28 JUL 94' 4 The taxpayer, by his taxation agent, lodged an objection to the amended assessment by letter dated 5 July 1994 as follows: 'On behalf of the taxpayer, I wish to object to the above assessment in respect of the amount deemed by you as income. At the time your Mr. Merlins visited my office, I advised that the taxpayer was overseas and that documentation would satisfy him that his assumption was wrong. He was not prepared to await the return of the taxpayer. The amount received was not payment for services as no service was rendered. It was a payment for the sale of proprietory rights of the taxpayer which commenced in 1984 and accordingly the sale of these rights is by way of a capital sale and therefore not subject to income tax. These were determined by the Supreme Court of NSW in August, 1985 and accordingly you are requested to issue an amended assessment.' 5 By letter dated 16 February 1996 the Commissioner disallowed the taxpayer's objection and gave notice of that objection decision 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.' 6 The taxpayer applied to the Tribunal pursuant to s 29(1) of the AAT Act for review of the Commissioner's decision disallowing the objection. The reasons for the application commenced as follows: 'The amended assessment under objection was numbered 291379/001 and was issued on or after 23 June 1994. The objection was made by letter of Ken Livingstone, the Applicant's tax agent to the Australian Tax Office dated 5 July 1994.

[3]

The amended assessment increased the Applicant's assessable income for the year to 30 June 1988 by $1,228,500. "representing payment for services rendered to Transfield Pty Ltd and Kumagai Limited (meaning Kumagai Gumi Company) under the Joint Venture Agreement entered into with them to secure the contract to build the Sydney Harbour Tunnel." ' All of the remaining reasons related solely to the amount of $1,228,500.00. There was no mention of penalty tax. 7 On 31 October 2003 solicitors acting for the taxpayer filed a statement of facts, issues and contentions on behalf of the taxpayer. Additional tax was not raised as an issue. Not surprisingly, the Commissioner's amended statement of facts, issues and contentions likewise made no reference to the issue of additional tax. 8 Taxation objections, reviews and appeals are governed by Pt IVC of the Administration Act. The amended assessment in this case was a 'taxation decision' for the purposes of Pt IVC - see s 14ZQ. Section 14ZL provides as follows: '(1) This Part applies if a provision of an Act or of regulations (including the provision as applied by another Act) provides that a person who is dissatisfied with an assessment, determination, notice or decision, or with a failure to make a private ruling, may object against it in the manner set out in this Part. (2) Such an objection is in this Part called ataxation objection.' 9 Section 14ZZK provided: 'On an application for review of a reviewable objection decision: (a) the applicant is, unless the Tribunal orders otherwise, limited to the grounds stated in the taxation objection to which the decision relates; and (b) the applicant has the burden of proving that: (i) if the taxation decision concerned is an assessment (other than a franking assessment) - the assessment is excessive; or (ii) if the taxation decision concerned is a franking assessment - the assessment is incorrect; or (iii) in any other case - the taxation decision concerned should not have been made or should have been made differently.' 10 Section 14ZR provided: '(1) If:

[4]

(a) a provision of an Act (including a provision as applied by another Act, but not including section 14E of this Act) provides that a person who is dissatisfied with a taxation decision may object against it in the manner set out in this Part; and (b) a notice incorporates notice of 2 or more such taxation decisions; then, for the purposes of the provision and of this Part, the taxation decisions are taken to be one taxation decision. (2) If: (a) under subsection (1), 2 or more taxation decisions are taken to be a single taxation decision (in this subsection called the deemed single taxation decision); and (b) the Commissioner makes an objection decision in relation to the deemed single taxation decision; and (c) the objection decision is, to any extent: (i) an ineligible income tax remission decision; or (ii) an ineligible sales tax remission decision; then, this Part has effect, in relation to any review or appeal, as if: (d) so much of the objection decision as consists of one or more ineligible income tax remission decisions were taken to be a separate objection decision; and (e) so much of the objection decision as consists of one or more ineligible sales tax remission decisions were taken to be a separate objection decision.' 11 Section 14ZU prescribes the manner in which the respondent's objection was to be made, including a requirement that it state in full and in detail the grounds that the person relies upon. The respondent's objection was a 'taxation objection' within the meaning of s 14ZL. Section 14ZY required the appellant to make a decision about the objection and that decision became an 'objection decision' within the meaning of that section. 12 Section 14ZZ provides that a person who is dissatisfied with the 'objection decision' may appeal to the Tribunal but only where, relevantly, an 'objection decision' is a 'reviewable objection decision'. The latter expression is defined in s 14ZQ to be an 'objection decision' that is not, relevantly, an 'ineligible income tax remission decision' within the meaning of s 14ZS. 13 Section 14ZS in the form it took at the relevant time was as follows: '(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]

Decision 24 There is no doubting the width of the construction of s 43 enunciated by Hill J in Secretary, Department of Social Security v Hodgson (1992) 37 FCR 32 at 39-40, approved in Commonwealth Bank Officers Superannuation Corporation Pty Ltd v Commissioner of Taxation (2005) 148 FCR 427 at [29]-[30] and referred to in Isaacs v Commissioner of Taxation (2006) 151 FCR 427 at [37]. However, that construction does not deal with, and the situations in those cases did not present, the problem created by s 14ZR and s 14ZS that arises here, namely a possible statutory prohibition upon use of the relevant power by the Tribunal. 25 An anomaly, if not a 'practical absurdity' (cf Kitto J in Rawson v Hobbs (1961) 107 CLR 466 at 488), is created by the Tribunal decision in this case. It is perfectly clear that s 14ZS would have prevented any challenge to the remission decision as such. In other words, if there were no challenge to the imposition of primary tax then there could be no challenge to the remission decision. Furthermore, insofar as s 14ZR(1) may have led to a different position, s 14ZR(2) implements the statutory intention to exclude particular remission decisions from review. The result of the Tribunal decision is that an appeal against an objection decision in relation to primary tax, even if quite hopeless and doomed to failure, entitles the Tribunal to review the remission decision on the merits of that decision alone, regardless of the fate of the appeal concerning the imposition of primary tax, despite the inability to directly review that decision on that basis. 26 The only authority to which the Court was referred, which relates to this set of provisions, is the decision of the Full Court in Grollo Nominees Pty Ltd and Others v Commissioner of Taxation (1997) 73 FCR 452 at 523-524. That case dealt with another potential anomaly arising out of these provisions, namely, a reduction by the Tribunal of the amount of primary tax leaving the amount of penalty above the threshold set by s 14ZS. As the Court remarked, it would seem wrong to leave in place penalties imposed by the Commissioner on the basis that an unduly high amount of primary tax was unpaid. The submission of the taxpayer, which was accepted by the Court, was that s 14ZS only excluded review of an objection decision which related wholly to the remission of additional tax. Section 14ZR was not referred to in the decision. It is not apparent why that was so. The issue in Grollo does not arise here but counsel for the Commissioner, no doubt keen to avoid a possible anomaly, suggested that the result of the formula in s 14ZS would change depending upon the ultimate decision as to the tax properly payable, leading to an ambulatory application of the section. Whether that is correct does not need to be decided in this case. Another possible solution may be found in the decision of the Full Court in Deputy Commissioner of Taxation v Mostyn (1987) 18 FCR 260. Be all that as it may, the provisions of s 14ZR must be applied in this case. 27 The notice of amended assessment expressly incorporated decisions concerning both primary tax and additional tax which, by virtue of s 14ZR(1), are taken to be one taxation decision (Commissioner of Taxation v Queensland Trading & Holding Company Ltd [2006] FCAFC 112). The taxpayer objected to that decision. The Commissioner made an objection decision pursuant to s 14ZY in relation to that deemed single taxation decision within the meaning of s 14ZR(2). The question is whether the objection decision was, to any extent, an ineligible income tax remission decision. The negative decision rejected the whole objection and so both original taxation decisions stood. What is the position if the objection, although relating to both taxation decisions by virtue of s ZR(1) and s ZR(2), only referred to one of them? By s 14ZS(2) an objection decision is an ineligible income tax remission decision if it relates to the remission of additional tax. The remission of additional tax is one of the relevant taxation decisions. Thus, the objection decision related to that remission. The condition provided by s 14ZR(2)(c) is satisfied. It follows that Part IVC has effect in relation to the appeal to the Tribunal as if the decision in relation to additional tax was taken to be a separate objection decision and so would be caught by s 14ZS (s 14ZR(2)(d)). 28 It may generally be correct to say that the Tribunal stands in the shoes of the decision maker, but that is subject to particular provisions which relate to the conduct of an appeal. The Tribunal exercises the powers granted by the Administration Act pursuant to the provisions of the AAT Act. The two statutes must be read together so far as possible. In that situation, a general power in the AAT Act cannot be used to circumvent the express limitations in the Administration Act. (See Saraswati v The Queen (1991) 172 CLR 1; Hoffman v Chief of Army (2004) 137 FCR 520 per Black CJ, Wilcox and Gyles JJ at [7]-[27]); Minister for Immigration and Multicultural and Indigenous Affairs v Nystrom [2006] HCA 50 per Gummow and Hayne JJ at [43]-[70]; per Heydon and Crennan JJ at [130]-[169]; and DC Pearce and RS Geddes, Statutory Interpretation in Australia, 6th edn, LexisNexis, Australia, 2006, paras [4.30]-[4.32].) In my opinion, s 14ZR, coupled with s 14ZS, govern the manner in which the Tribunal appeal was to be conducted in this case, whether or not the same provisions would bind the Commissioner. In my opinion, s 14ZR makes clear a legislative intention that ineligible income tax remission decisions are outside the purview of the Tribunal. It follows that, in a case where there is no amendment to the primary tax, the decision does not cease to be an ineligible income tax remission decision, even if the ambulatory construction suggested on behalf of the Commissioner were adopted. 29 In my opinion, the same conclusion would follow if the reasoning adopted by the primary judge, also reflected in the Commissioner's alternative argument, is followed. On this hypothesis the only decision under review would be that relating to primary tax because of the limited scope of the objection (s 14ZZK). On any view, there has to be a relevant association between the power to be exercised pursuant to s 43 of the AAT Act and the review by the Tribunal of the decision in question before it. If the Tribunal affirms the decision as to primary tax, then there is no relevant association between that decision and the decision to remit additional tax. Affirmation of the decision as to primary tax changes nothing in relation to additional tax. The point is illustrated by noting that the reasons of the Tribunal for remitting the additional tax in this case had nothing relevant to do with the decision as to primary tax. 30 I cannot see that the arguments for the taxpayer based upon ss 2A, 25(4) or 33 of the AAT Act and s 14ZZK of the Administration Act alter the position. 31 I would answer the questions of law proposed as follows: Q.1. Whether the Tribunal exceeded the jurisdiction conferred on it by s 14ZZ of the Administration Actin purporting to direct the applicant to remit in full additional tax imposed on the respondent for the year ended 30 June 1988? A. Jurisdiction is not strictly the issue. The Tribunal had jurisdiction to deal with the matter before it. However, as it had affirmed the liability for primary tax, it did not have power to remit additional tax in exercising that jurisdiction. Q.2. The proper interpretation of s 14ZQ and s 14ZS of the AdministrationAct. A. Inappropriate to answer (Comcare v Etheridge (2006) 149 FCR 522 per Branson J at [19]). Q.3. Whether the Tribunal erred in law in purporting to direct the applicant to remit additional tax in full? A. Yes. It had no power to so direct. 32 In my opinion, the contention as to estoppel sought to be advanced in this proceeding is misconceived. It is inappropriate to be raised for the first time on appeal to the Full Court. It is a mixed question of fact and of law. (See Coulton v Holcombe (1986) 162 CLR 1.) For the same reason, it is inappropriate to be raised on an appeal on a question of law pursuant to s 44 of the AAT Act (HBF Health Funds Inc v Minister for Health and Ageing (2006) 149 FCR 291 at [67]). It is submitted for the Commissioner that, in any event, the contention is misconceived on the merits, both as to the facts and the law. There is no need to enter upon that debate. The application to file a notice of contention should be refused. 33 Normally it would be appropriate to exercise the power granted by s 44(4) of the AAT Act and set aside the direction in question rather than incur the additional costs of remitting the matter to the Tribunal. However, in the present case, it is appropriate to remit the matter to the Tribunal to be dealt with according to law. That would afford the taxpayer the opportunity, if so advised, of taking other proceedings to restrain interference with the Tribunal's decision based upon the estoppel that is claimed to operate. I should not be taken as expressing any opinion about the wisdom of taking that course. 34 I would allow the appeal, set aside the order dismissing the appeal to the Court and in lieu thereof allow the appeal to the Court and remit the matter to the Administrative Appeals Tribunal to be decided according to law. In view of the arrangements between the parties, the Commissioner should pay the respondent's costs of this appeal and the order for costs below should not be disturbed. I certify that the preceding thirty-four (34) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Gyles.

[23]

46 The Tribunal found that there were mitigating circumstances that should be taken into account on review in the exercise of the discretion in s 227(3) to remit additional tax. Those circumstances included the following matters: the income tax return was prepared by a tax agent and it was to be inferred that the taxpayer had acted on professional advice in treating the receipt as non-assessable and in making the level of disclosure set out in the return; and the assessability of the receipt was a contentious issue within the meaning of the Commissioner's guidelines concerning the remission of additional tax (IT2517). The Tribunal also noted that the guidelines said that a statement which is clearly arguable as a matter of law would not, as a general rule, result in the imposition of any penalty even though the statement may be found to have been inaccurate. 47 The Tribunal concluded: '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.'

[37]

67 The Commissioner contends that this holding was erroneous, essentially because the assessment of additional tax involved or gave effect to a remission under s 227(3) and there was a deemed objection to that assessment by force of s 14ZR. 68 It is helpful to separate the steps in the Commissioner's argument. The starting point is the nature of the amended assessment insofar as it related to additional tax. As it operated in 1988 when the taxpayer filed his return of income, s 223(1) of the ITAA provided that where a taxpayer makes a false or misleading statement in his return, or omits material from the return which renders it misleading, so that the tax properly payable by the taxpayer exceeds the tax that was assessed on the basis of the return, the taxpayer is liable to pay, by way of penalty, additional tax equal to double the amount of the excess. Section 223(7) provided that where a person omits from a return any assessable income that he or she derived, the person shall for the purposes of s 223 be taken to have made a statement in the return to the effect that the person did not derive the assessable income during the period. Where s 223 applied, it triggered the Commissioner's duty to make an assessment of additional tax under s 227(1). Section 227(3) provided that the Commissioner may, in his discretion, remit the whole or any part of the additional tax payable by a person. This power could be exercised by the Commissioner prior to, or when making, an assessment of additional tax under s 227(1). The power can also be exercised, or re-exercised, by the Commissioner at some other or later time, such as when considering a notice of objection. Indeed, the power to remit can be exercised independently of the process of assessment and objection: Deputy Commissioner of Taxation v Mostyn (1987) 18 FCR 260. 69 In this case, the amount of additional tax was less than double the amount of primary tax imposed by the amended assessment, so the Commissioner must have exercised his powers of remission under s 227. For this reason, the Commissioner's argument characterised the assessment of additional tax as a 'remission decision'. 70 The second step in the Commissioner's argument invokes the provisions of s 14ZR. Section 14ZR(1) deems two tax decisions (viz, the assessment of primary tax and the assessment of additional tax) to be one taxation decision for the purposes of s 14ZR and of Part IVC (which includes ss 14ZS and 14ZZ). By force of s 14ZR(1), the taxpayer's objection to the amended assessment by letter dated 5 July 1994 must be regarded as an objection against the whole of the amended assessment, including the assessments of primary and additional tax. Section 14ZR(2) addresses the situation where the Commissioner makes an objection decision in relation to a deemed single taxation decision. Reading ss 14ZR(2)(c) and 14ZS together, s 14ZR(2)(c) applies if 'to any extent' the objection decision 'relates to' the remission of additional tax payable by a taxpayer under s 223 and the exception for assessments of additional tax exceeding the threshold of 20 per cent per annum does not apply. In that event, so much of the objection decision as constitutes an ineligible income tax remission decision is taken to be a separate objection decision. 71 The third and critical step in the Commissioner's argument is that it is enough to satisfy the relationship required by s 14ZS(2) that s 14ZR applies and the underlying assessment of additional tax by the Commissioner involved an exercise of his power of remission under s 227(3). 72 Thus, the competing considerations are that on the one hand the Commissioner's objection decision did not make any reference to the assessment of additional tax, and on the other hand the assessment of additional tax involved or gave effect to a remission decision. The fine but crucial question of construction of s 14ZS(2) is whether an objection decision must in fact consider the remission of additional tax before it can fall within s 14ZS(2); or whether it is sufficient that the Commissioner disallows an objection that is deemed to relate to an assessment of additional tax that involved some remission under s 227(3) without turning his mind to the question whether he should use his power of remission to vary that assessment. The Commissioner concedes that Edmonds J was not referred to s 14ZR, so his Honour did not consider the question of construction in quite this way. 73 The question which must be answered is whether, objectively, the Commissioner's decision to disallow the taxpayer's deemed objection to the entirety of the notice of amended assessment was, to any extent, a decision that related to the remission of additional tax. The answer depends on what kind of connection is required when the words 'relates to' are used in conjunction with the expression 'to any extent'. 74 Edmonds J observed 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, but nonetheless substantial or real: at 578 [15]. 75 In O'Grady v Northern Queensland Co Ltd (1990) 169 CLR 356 at 367, the High Court considered the meaning of the cognate phrase 'in relation to'. Dawson J said that, read out of context, those words are wide enough to cover every conceivable connection; but the words should not be read out of context - what is required is a relevant relationship having regard to the scope of the Act: see also Brennan J at 364 and McHugh J at 376. In PMT Partners Pty Ltd (in liq) v Australian National Parks and Wildlife Service (1995) 184 CLR 301 at 313, Brennan CJ, Gaudron and McHugh JJ said that the closeness of the relationship required by the expression 'in or in relation to' must be ascertained by reference to the nature and purpose of the provision in question and the context in which it appears: see also Toohey and Gummow JJ at 330-331. 76 The relevant statutory context is to be found primarily in Part VII of the ITAA and Part IVC of the Administration Act. I have already described the operation of ss 223(1) and 227 and the respects in which an assessment of additional tax under s 223 is linked to the assessment of primary tax. 77 Section 14ZS(2) excludes from the category of ineligible income tax remission decisions cases in which the additional tax is payable under various other provisions of Part VII of the ITAA, whatever its amount. In general terms, these provisions operate where certain anti-avoidance or tax shortfall provisions apply. The rationale for excepting them from s 14ZS(2) seems to be that, where the imposition of additional tax depends on a determination that special provisions apply, the taxpayer should be able to apply for review of an objection decision that relates to the remission of additional tax. Accordingly, the exception of these provisions sheds no light on the question of construction that arises in this case. 78 Section 14ZS(2) also excludes cases arising under s 223 of the ITAA where the amount of additional tax 'after the decision is made' exceeds 20 per cent per year of the amount of relevant affected tax. The words 'after the decision is made' refer back to the objection decision that is mentioned at the commencement of the subsection. On balance, I do not think that these words afford a reliable indication that the subsection is concerned with an objection decision that actually addresses the question whether additional tax should, or should not, be remitted from that stated in the assessment. There is no difficulty in giving meaning to the words where the amount of the additional tax assessment is not altered, and indeed never considered, by the objection decision. In that scenario, the additional tax either will, or will not, exceed the 20 per cent threshold after the decision is made. 79 Somewhat greater assistance is provided by the decision of the Full Court of this Court (Sheppard, Foster and Whitlam JJ) in Grollo Nominees Pty Ltd v Commissioner of Taxation (1997) 73 FCR 452 ('Grollo'). In its judgment, the Court considered the proper construction and application of s 14ZS(2) at 523-524: 'Two further matters remain to be dealt with. They do raise questions of law. The first dealt with the application of s 14ZS of the Administration Act. In the submission of counsel for the Commissioner, there was no appeal to the Tribunal permitted because the 20 per cent limit imposed by s 14ZS of the Administration Act was not exceeded. In the submission of counsel for the appellants, the provisions of s 14ZS of the Administration Act did not preclude the review of the Commissioner's decision because the relevant objection decisions that were before the Tribunal related to the correctness of the whole of the assessments, not just the correctness of the remission of additional tax. In the appellants' submissions, the effect of s 14ZS was not to exclude a review of an objection decision which related in some part only to remission of additional tax. It only excluded review of an objection decision which related wholly to the remission of additional tax. That, so counsel submitted, was not the case here. We think that the question of construction which counsel's submission presents for decision is not without difficulty. The relevant words of s 14ZS(2) are "An objection decision is an ineligible income tax remission decision if it relates to the remission of additional tax payable by a taxpayer ...". The expression "it relates to" is an expression of wide import. It is capable of applying to the words which are used even though the remission decision is only part of what is involved in the totality of the decision. On the other hand, it would seem an odd thing if there were, as here there is, 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. In other words, if as indeed happened, the Commissioner assessed a taxpayer on the basis that the whole of a particular sum of money was assessable income in its hands and it was found by the Tribunal that only half the amount was income, it would seem wrong to leave in place penalties imposed by the Commissioner on the basis that the whole amount was assessable income. It is that feature of the matter which has persuaded us that effect should be given to the submissions of the appellants.'

[38]

Accordingly, s 14ZS(2) must be construed in a manner that allows an application to the Tribunal for review of the primary tax assessment to carry with it the right to consider and determine any consequential imposition of additional tax. 80 In holding that the Tribunal needed to have the ability to undertake consequential adjustments of additional tax, the Full Court did not suggest that the need only arises where the Tribunal reduces the amount of a primary tax assessment to such an extent that an assessment of additional tax that was previously below the threshold imposed by s 14ZS(2)(b)(i) rises above that threshold. That situation could be addressed by giving s 14ZS(2) an ambulatory operation: ie if s 14ZS(2) is applied after the Tribunal's adjustment of the primary tax assessment, s 14ZS(2) would not be attracted because 20 per cent threshold is exceeded. The Full Court in Grollo went further and concluded that, if the primary tax assessment is reduced to any extent, then the Tribunal should be able to review any penalties that were imposed on the basis that the primary tax was correctly assessed by the Commissioner. 81 In Grollo, the Full Court focused more on the effect that should be given to s 14ZS(2) where the Tribunal varies an assessment of the primary tax than on the way in which s 14ZS(2) should be read and interpreted so as to achieve that effect. It concluded its discussion by saying that effect should be given to the submissions of the appellants. The appellants in Grollo argued that an objection decision will only be an ineligible income tax remission decision if it relates wholly, ie only, to the remission of additional tax. At first blush, it is hard to see how an objection decision could be characterised as one that relates wholly to the remission of additional tax unless it specifically considered whether or not additional tax should be remitted. The Full Court's decision also suggests that an objection decision which considered an objection to the assessment of primary tax, or a challenge to the assessment of additional tax on the grounds that the preconditions in s 223(1) were not satisfied, would fall outside s 14ZS. This would be so even if the notice of objection also challenged the amount of the additional tax assessment on the ground that it should be further remitted. 82 The decision in Grollo focused on the case where the Tribunal needs to vary an assessment of additional tax in consequence of its decision concerning the primary tax assessment. It did not consider the question of construction that arises in this case. Moreover, it did not address s 14ZR(2)(c) and its use of the expression 'to any extent'. 83 This brings me back to the purpose and underlying policy of ss 14ZR and 14ZS(2). Section 14ZR(1) deems several taxation decisions that were incorporated in a single notice to be one taxation decision. By doing so, s 14ZR(1) ensures that, regardless of the grounds specified in the taxpayer's notice of objection, the Commissioner can, if he wishes, deal with any of the issues raised by the deemed single taxation decision when he considers a notice of objection and makes an objection decision. The point can be illustrated by taking the common case of a single notice of assessment that contains both primary tax and additional tax assessments. If in such a case, despite s 14ZU, a notice of objection is filed that does not object to the assessment of additional tax and does not specify any grounds for such an objection, s 14ZR(1) ensures that the Commissioner's powers in that circumstance are not limited to dealing with the matters that are expressly raised by the notice of objection. The Commissioner can address both aspects of the deemed single income tax decision and, if he thinks fit, he can allow the objection insofar as it relates to additional tax either wholly or partly by remitting the amount of the additional tax assessment to a lesser sum. However, it is hard to detect any statutory intention that s 14ZR(1) should go further and impose a positive obligation on the Commissioner to reconsider an assessment of additional tax in the absence of any relevant grounds of objection being stated in the notice of objection. Indeed, if s 14ZR(1) took this extra step, it might create some tension with s 14ZU(c). 84 The purpose of s 14ZR(2) is quite different. Its objective is to ensure that the deeming provision in subs (1) does not give the taxpayer a right to review the Commissioner's objection decision that would not otherwise exist. Therefore, for the purposes of any review or appeal, s 14ZR(2) splits the Commissioner's objection decision apart if the objection decision is to any extent an ineligible income tax remission decision as defined in s 14ZS(2). Where s 14ZR(2) applies, so much of the objection decision as consists of one or more ineligible income tax remission decisions is taken to be a separate objection decision for the purposes of any review or appeal. 85 The words 'to any extent' in s 14ZR(2) are words of extension. They loosen the nexus that might otherwise be required by the words 'relates to' where they appear in s 14ZS(2). 86 The long history of provisions in the income tax laws that aim to limit or exclude any external administrative review of remission decisions by the Commissioner sheds some light on why these words were included in s 14ZR(2). As originally enacted in 1936, the ITAA limited the taxpayer in every reference to the Board of Review or appeal to the Court to the grounds stated in his or her notice of objection. Section 192 gave the Board of Review power to review such decisions of the Commissioner as are referred to it under the Act. Section 193(1) gave the Board all the powers and functions of the Commissioner in making assessments, determinations and decisions under the Act. However, s 193(2) provided as follows: 'The Board shall not have power to review decisions of the Commissioner relating to the remission of additional tax except decisions relating to the remission of additional tax imposed by section two hundred and twenty-six of this Act where the additional tax payable, after the making by the Commissioner of his decision, exceeds - (a) …'.

[42]

There followed a number of subparagraphs which provided for various thresholds, some of which were set at 20 per cent per annum of the relevant affected tax. 90 It seems that s 193(2) was not aimed solely at objection decisions as it referred more widely to 'decisions of the Commissioner relating to the remission of additional tax…'. On this reading, the section precluded the Tribunal undertaking any review of a remission decision by the Commissioner, including a remission decision that was integral to the making of the original assessment of additional tax. 91 The provisions of the ITAA concerning taxation objections, reviews and appeals were transferred into the Administration Act in 1991 by the Taxation Laws Amendment (No 3) Act 1991 (Cth). In doing so, a new drafting style was adopted. There is nothing to suggest that the new provisions in Part IVC of the Administration Act were intended to enlarge the powers and jurisdiction of the Tribunal in any significant way. The explanatory memorandum to the 1991 Bill contains no such suggestion; indeed, it contains nothing of assistance. 92 In Grollo, the Full Court said that the construction of s 14ZS(2) is not without difficulty. I think the same observation can be made about the combined operation of ss 14ZR and 14ZS(2). The principal difficulty arises from the fact that both ss 14ZR(2) and 14ZS(2) are directed to the nature and effect of the objection decision by the Commissioner, rather than any remission decision made by the Commissioner. However, the gap between these two concepts is largely, if not wholly, diluted by the words 'to any extent' that appear in s 14ZR(2). 93 Taking all of the foregoing considerations into account, I have concluded that the Commissioner's objection decision in this case did relate, to an extent, to the remission of additional tax payable under s 223. If the Commissioner in determining the taxpayer's objection had either made a decision to remit the additional tax, partly or wholly, or refused to do so, there would be no doubt that the Commissioner had made an objection decision that relates to the remission of additional tax under s 223. Although the connection is more attenuated, I consider that the same conclusion should follow where the assessment of additional tax involved or gave effect to a remission of additional tax, and the taxpayer's objection related to a deemed single taxation decision that includes the assessment of additional tax. In that situation, the Commissioner's decision to disallow the objection confirms, and therefore relates to, the assessment of additional tax. It also follows, in my view, that the objection decision relates, to an extent, to the Commissioner's earlier remission decision that formed an integral part of the additional tax assessment. If the Commissioner does not turn his mind to the question whether additional tax should be remitted or maintained, the connection will be indirect. But, in view of the phrase 'to any extent' in s 14ZR(2), the connection is sufficient to satisfy the description in ss 14ZR(2) and 14ZS(2). 94 Accordingly, I disagree with the primary judge's conclusion that s 14ZS(2) had no application. In my view, s 14ZS(2) applied, with the consequence that the Tribunal had no jurisdiction to make decisions in relation to the remission of additional tax. The Tribunal's only relevant jurisdiction is to review objection decisions that are referred to it in accordance with s 14ZZ. Since the Commissioner's objection decision related to the remission of additional tax, it was not a reviewable objection decision within the meaning of s 14ZZ(b). 95 The taxpayer argued that, as the Commissioner had not raised s 14ZS(2) before the Tribunal and had argued the merits of the case concerning the remission of additional tax, he had waived, or should be estopped from raising, any arguments founded on s 14ZS(2). In my opinion, there is no scope for these doctrines to operate because s 14ZS(2) goes directly to the jurisdiction of the Tribunal. Jurisdiction cannot be conferred by consent or by the conduct of the parties: Thomson Australian Holdings Pty Ltd v Trade Practices Commission (1982) 148 CLR 150 at 163. 96 My findings as to ss 14ZS(2) and 14ZZ are sufficient to dispose of the appeal. The Tribunal did not have the jurisdiction to make the orders it did and consequently the appeal must be allowed. However, several other issues were argued and, in case this matter should go further, it is appropriate that I address them.

[43]

Section 43(1) of the AAT Act 97 If s 14ZS is put to one side and if the assumption is made that the Tribunal had jurisdiction under s 14ZZ of the Administration Act and s 25 of the AAT Act to review the Commissioner's objection decision insofar as it related to additional tax, it is quite clear that s 43(1) of the AAT Act would give the Tribunal ample power to make an order of the kind it did. The purpose of s 43(1) is to give the Tribunal the same powers and discretions as could have been exercised by the Commissioner when he made his decision on the objection. As Edmonds J pointed out, the Commissioner could have further remitted the additional tax imposed by the notice of amended assessment. The fact that the Commissioner had already exercised a discretion to assess additional tax at something less than the maximum prescribed by s 223(1) was no bar or impedient to his further remission of the additional tax at the time of making his objection decision. 98 These propositions are confirmed by the authorities that have considered s 43(1). In Commonwealth Bank Officers Superannuation Corporation Pty Ltd v Commissioner of Taxation (2005) 148 FCR 427, the Full Court of this Court (Finn, Emmett and Edmonds JJ) said at 433 [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 decision-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 ľ see Department of Social Security v Hodgson (1992) 37 FCR 32 at 39-40. 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.'

[44]

99 It is helpful to extract the passage from Hill J's judgment in Secretary, Department of Social Security v Hodgson (1992) 37 FCR 32 ('Hodgson') at 39-40, which was adopted and applied by the Full Court, because it deals with a fact situation which is not all that remote from the circumstances of the present case: 'Although I accept, therefore, that a decision to recover an overpayment does not necessarily involve a consideration of waiver, I do not think that it follows that in an appeal against the decision to proceed to recover an overpayment where the question of waiver has been raised by an applicant the Tribunal is precluded from exercising the power to waive under s 43(1) of the Administrative Appeals Tribunal Act. The language of s 43 is quite clear and unambiguous. It 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 not necessary or permissible to put a gloss upon s 43 that would permit the Tribunal to exercise the decision-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. 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. The Tribunal is, like the Taxation Boards of Review discussed in Jolly v Commissioner of Taxation(Cth) (1935) 53 CLR 206 at 214, "another executive body in an administrative hierarchy". Where its jurisdiction is enlivened by an application to review an administrative decision it exists to do again, within the limits of the review, that which the decision-maker was entrusted to do. To adapt what was said by Kitto J in Mobil Oil Australia Pty Ltd v Commissioner of Taxation(Cth) (1963) 113 CLR 475 at 502, the Tribunal in deciding whether an overpaid benefit should be recovered has the function of working out as a step in administration what it considers the situation to be. If the original decision-maker could legitimately have considered the issue of waiver before the issue of recovery and would have been obliged so to do if requested by the recipient of the overpayment, why should the Tribunal be precluded from so doing when for the purposes of the review it stands in the shoes of the original decision-maker? It follows, in my view, that the Tribunal had jurisdiction to determine for itself, but as part of its review of the decision to recover the overpaid benefits, the question of whether some or all of the benefit should be waived.'

[45]

The foregoing principles were reiterated by the Full Court in Isaacs v Commissioner of Taxation (2006) 151 FCR 427 at 435 [37]. 100 The Commissioner argued that, if the decision under review in this case is correctly identified, it is clear that the boundaries of the decision made by the Commissioner in dealing with the objection did not encompass the remission of additional tax in any sense. It is difficult to see how this argument assists the Commissioner. In the first place, if the boundaries of the Commissioner's objection decision did not encompass the remission of additional tax in any sense, as the Commissioner contended, that would suggest that s 14ZS(2) was not attracted (contrary to my view and to the Commissioner's principal argument). Secondly, the authorities on s 43(1) make it clear that the Tribunal enjoys all of the powers that the Commissioner could have exercised in making the objection decision that is under review. It is not limited to the powers that the Commissioner in fact exercised, or considered exercising, when he made the objection decision. 101 In Australian Securities and Investments Commission v Donald (2003) 136 FCR 7 ('Donald'), the Commission had imposed a banning order on the respondent under ss 829 and 830 of the Corporations Law but, on review, the Administrative Appeals Tribunal substituted a decision which reduced the length of the ban and accepted an undertaking from the respondent as to his continuing education and other conduct. The Commission had power under s 93AA of the Australian Securities and Investments Commission Act 1989 (Cth) to accept a written undertaking of this kind but a decision by the Commission under this provision was not reviewable by the Tribunal. The Full Court (Gray, Kenny and Downes JJ) held that it was open to the Tribunal, just as it was open to the Commission, to treat s 93AA as amongst the powers available to it, provided it does so only for the purpose of reviewing the reviewable decision that was made by the Commission: at 9 [3], 16 [32] and 21 [56]. 102 At 16 [32], Kenny J said that: 'Accordingly, whilst there is no right to apply to the Tribunal to review a decision by the Commission not to accept an undertaking under s 93AA of the ASIC Act, it is open to the Tribunal, just as it was open to the Commission, to treat s 93AA as amongst the powers available to it, providing it does so only for the purpose of reviewing the reviewable decision that was made by the Commission.'

[48]

SECTION 14zzk 106 The Commissioner advanced an alternative argument which assumed that the orders made by the Tribunal concerning additional tax were not precluded by s 14ZS. The argument was that the Tribunal had no power or jurisdiction to make the orders it did by reason of the operation of s 14ZZK. Section 14ZZK limits the applicant for review to the grounds stated in the taxation objection to which the decision relates, unless the Tribunal orders otherwise. In my opinion, the Commissioner's argument based on s 14ZZK should not be accepted. 107 It must be kept steadily in mind that this is an appeal, on a question of law, from the Tribunal's decision. The Commissioner's amended notice of appeal from the Tribunal does not raise any question of law concerning the operation of s 14ZZK. Further, when the case was before the primary judge, the Commissioner did not seek leave to further amend its amended notice of appeal so as to identify a question of law, and to add a ground of appeal, relating to s 14ZZK. There is nothing in the record before this Court to suggest that the argument that is now advanced about s 14ZZK was put to the Tribunal or to Edmonds J. In these circumstances, the s 14ZZK argument does not identify any error of law. 108 In this Court, the respondent did not raise any objection that the Commissioner's argument based on s 14ZZK fell outside the proper scope of the appeal. Nevertheless, I do not consider that this Court can or should entertain the argument. 109 The significance of the point not having been raised before the Tribunal does not lie in procedural niceties; it raises a matter of basic procedural fairness. The argument in the Tribunal proceeded on the basis that it was open to the taxpayer to contest the quantum of the additional tax assessment. By his conduct, the Commissioner accepted that the question of additional tax was in contest before the Tribunal. In the course of the Tribunal proceedings, the Commissioner did not raise any objection based on s 14ZZK. Had he done so, there would have been a real prospect that the Tribunal would have made a specific order under s 14ZZK(a) permitting the taxpayer to raise the questions he did concerning additional tax. If these events had transpired in the course of ordinary civil litigation, it is probable that the Commissioner would be regarded as bound by the way in which he conducted the case before the Tribunal: see Coulton v Holcombe (1986) 162 CLR 1 at 7-8; and Water Board v Moustakas (1987) 180 CLR 491 at 497. 110 Different considerations might come into play if s 14ZZK deprived the Tribunal of jurisdiction, as jurisdiction cannot be conferred by consent. But s 14ZZK does not go to the jurisdiction of the Tribunal, which is attracted by an application for review that satisfies the requirements of s 14ZZ. On its face, s 14ZZK(a) assumes that the Tribunal has jurisdiction and empowers the Tribunal to make an order permitting the applicant to go beyond the grounds stated in the taxation objection. 111 The taxpayer argued that s 14ZZK is in the nature of a procedural condition that speaks to the taxpayer, but which does not limit the powers of the Tribunal. Section 14ZZK is found in Division 4 which contains various modifications as to the way in which the AAT Act is to apply to the review of objection decisions: see s 14ZZA. Section 14ZZK does not purport to modify any particular provision of the AAT Act; rather it is an additional provision that regulates the way in which the review of an objection decision is to proceed: cf s 25(6) of the AAT Act. 112 The taxpayer relied upon Project Blue Sky Inc v Australian Broadcasting Authority (1998) 194 CLR 355 at 391 [95] and Berowra Holdings Pty Ltd v Gordon (2006) 228 ALR 387 ('Berowra'). In Berowra, the High Court held that s 151C of the Workers Compensation Act 1987 (NSW), which stipulated a six month delay before the commencement of Court proceedings against an employer for damages, did not impose a statutory prohibition on the commencement of proceedings or a precondition to the Court's jurisdiction to entertain the proceedings. In their joint judgment, Gleeson CJ, Gummow, Hayne, Heydon and Crennan JJ said at 395 [36]-[37]: 'Proceedings commenced by a worker in contravention of s 151C engage the jurisdiction and procedural rules of the court in question. Such proceedings are vulnerable to an application by the defendant to strike out the initiating process or to move for summary dismissal, but they are not a "nullity". Once a plaintiff has commenced proceedings, s 151C must be understood in connection with the procedural structure for the conduct of litigation in that court, not in isolation from it. This is not to subjugate the statute to the Rules, but to recognise that the subject-matter with which the statute deals is "rights" in the context of actual or apprehended litigation, and to understand the function of the Rules of Court and procedural law in facilitating adjudication of disputed claims. The upshot is that the effect of non-compliance with s 151C will depend in each case upon the actions of the defendant in the context of the relevant Rules of Court. Where the defendant requires an order by the court for the defendant to give effect to a point as to s 151C, in exercising its discretion the court will take into account numerous factors. Not all of these (as Lord Griffiths recognised in Ketteman v Hansel Properties) may be measured in economic terms.'

[49]

113 Their Honours added that once it was appreciated that the Court has jurisdiction and that its procedural rules have been engaged, concepts such as waiver, acquiescence and estoppel are confusing and imprecise: see Commonwealth v Verwayen (1990) 170 CLR 394 at 456 and 482-483. The relevant inquiry is how the Court should exercise its discretionary powers in the event that the plaintiff does not comply with s 151C. In a separate judgment, Kirby J agreed that, in the type of proceedings to which s 151C was addressed, it was left to the parties in the ordinary way by their pleadings to raise issues as to the application of s 151C, thereby presenting them to the Court for resolution. 114 Although there are obvious differences between Court proceedings and review proceedings before the Tribunal, the decision in Berowra provides some guidance in determining how s 14ZZK should be approached. In my opinion, the better view is that s 14ZZK does not limit the powers or jurisdiction of the Tribunal. Like rules of pleading in a court, s 14ZZK regulates the way in which the Tribunal is to conduct its proceedings. It confines an applicant for review to the grounds stated in the taxation objection unless the Tribunal otherwise orders. It should be regarded as a provision that is directed to the parties to the review. The effect of any non-compliance with s 14ZZK will depend on the actions of the parties, whether they raised any objection based on s 14ZZK, and whether they submitted issues to the Tribunal for its decision which travelled beyond the grounds stated in the notice of objection. 115 The taxpayer couched many of its arguments concerning s 14ZZK in terms of waiver or estoppel. In my opinion, it is unnecessary to have recourse to concepts of waiver or estoppel to reject the Commissioner's arguments based on s 14ZZK. For the reasons I have given, the s 14ZZK argument does not establish that the Tribunal made an error of law that falls within the proper scope of this appeal.

Commissioner of Taxation v Hornibrook

At a glance

Court

Decision date

Before

Source

Judgment (55 paragraphs)

Parties

Legislation Cited (8)

Cases Cited (27)

Cited By (3)