Commissioner of Taxation v Moignard

The application of s 14ZZK of the TA Act 80 Two of the Commissioner's grounds of appeal related to the AAT's application of s 14ZZK of the TA Act. First, the Commissioner contended that the AAT had "misapplied and/or reversed" the onus of proof imposed on Mr Moignard by s 14ZZK. Secondly, the Commissioner contended that the AAT had failed to determine, as required by s 14ZZK(b)(i), what the assessment of Mr Moignard's tax liability should have been, given that such a determination was a necessary step to a finding that the amended assessment was excessive. 81 The submissions of the parties on these grounds tended to overlap and it is convenient to address them together. 82 The parties made their submissions at the hearing by reference to s 14ZZK of the TA Act as it has been in force since 1 July 2013. However, it was s 14ZZK as in force between 1 July 2012 and 30 June 2013 which is the relevant provision as Mr Moignard lodged his application in the AAT on 27 September 2012. Section 14ZZK as in force in that period provided: 14ZZK Grounds of objection and burden of proof 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 of franking assessment or a starting base assessment) - the assessment is excessive; or (ii) if the taxation decision concerned is a franking assessment or a starting base assessment - the assessment is incorrect; or (iii) in any other case - that the taxation decision concerned should not have been made or should have been made differently. 83 Following the hearing, my Associate drew the parties' attention to the correct provision and invited them to make short written submissions directed to it. The parties conferred and, commendably, provided a joint supplementary submission. 84 Section 14ZZK applies to proceedings in the AAT. It is subpar (b)(i) which was pertinent in this case, meaning, prima facie, that Mr Moignard had the burden of proving that the amended assessment issued on 4 April 2011 to which he had objected was "excessive". 85 In relation to the complaint that the AAT had reversed the onus of proof, the Commissioner made two submissions. First: The Tribunal's apparent focus on the evidence on matters such as: (a) the payment of the proceeds of sale into the NAB and BTH accounts, and (b) the taxpayer's analysis of how the funds were spent thereafter, rather than [properly] on evidence of a valid distribution to the WLT, is demonstrative of a misapplication, or an inversion, of the applicable onus of proof which lay on the taxpayer. However, this submission was not developed and it is not apparent how the AAT's focus on the identified matter demonstrated a reversal or misapplication of the onus of proof. 86 Secondly, the Commissioner submitted that "to the extent that the AAT required the Commissioner to prove an "allocation" of income amounting to a present entitlement, that was both an error as to the application of the statute and a reversal of the onus". This complaint fails. The AAT did not require the Commissioner to prove an "allocation". As indicated above, the AAT referred to an allocation only as a shorthand label for the exercise of discretion upon which s 101 of the ITAA operated. 87 Ultimately, the Commissioner's submission in support of these two grounds became more confined and was to the following effect: it was for Mr Moignard to establish that he was not assessable on any part of the amount in dispute; the AAT's rejection of the Commissioner's submissions concerning s 101 and the deposit of funds into the NAB Classic Banking Account and the BTH Account did not relieve Mr Moignard from that onus; which he had to discharge, particularly having regard to the default distribution provision in cl 3(4) and (5) of the trust deed and the evidence that some of the monies in the NAB Classic Banking Account had been applied to meet personal expenses. 88 In considering the content of the obligation imposed by s 14ZZK(b)(i) it is appropriate to have regard to aspects of its history. Section 14ZZK of the TA Act was, in slightly different form, formerly contained in s 190 of the ITAA. Section 190 provided: Upon every such reference or appeal - (a) The taxpayer shall be limited to the grounds stated in his objection; and (b) The burden of proving that the assessment is excessive shall lie upon the taxpayer. 89 Section 190 was considered by the High Court in a number of cases. In Gauci v Commissioner of Taxation (1975) 135 CLR 81, Mason J said at 89: Section 190(b) of the Act imposed on the appellants the burden of proving that the assessments were excessive. … The Act does not place any onus on the Commissioner to show that the assessments were correctly made. Nor is there any statutory requirement that the assessment should be sustained or supported by evidence. The implication of such a requirement would be inconsistent with s 190(b) for it is a consequence of that provision that unless the appellant shows by evidence that the assessment is incorrect, it will prevail. Although Mason J was in dissent in Gauci, that view of s 190 has been regarded as authoritative: McCormack v Commissioner of Taxation (1979) 143 CLR 284 at 303, 306, 323. 90 Section 190(b) was construed as imposing on the taxpayer the burden of proving the true tax liability of that taxpayer. In Commissioner of Taxation v Dalco (1990) 168 CLR 614 at 621, Brennan J said: A taxpayer, who seeks to discharge the burden of proving that the amount shown in the notice of assessment is excessive, is limited by s 190(a) to the grounds stated in an objection against the assessment. … But an objection and a Commissioner's notice of decision on the objection are not pleadings which so confine the issues as to preclude the Commissioner from putting the taxpayer to proof of the true amount of his taxable income. After all, the purpose of the procedure of assessment, objection and appeal or review is to ascertain the true tax liability of the taxpayer under the substantive provisions of the Act. … It would be inappropriate for a Court determining an appeal to make an order altering the tax liability assessed (section 199) unless the Court were satisfied that the amount to which it proposed to alter the assessment represented the true tax liability of the taxpayer. (Emphasis added) 91 Later (at 623) Brennan J quoted with approval a passage in the judgment of Kitto J at first instance in George v Federal Commissioner of Taxation (1952) 86 CLR 183 at 189: [Section] 190(b) places the burden of proving that the assessment is excessive upon the appellant; and in order to carry that burden he must necessarily exclude by his proof all sources of income except those which he admits. His case must be that he did not derive from any source taxable income to the amount of the assessment. (Emphasis added) 92 In a short separate judgment in Dalco, Deane J at 627 held that the taxpayer's failure to discharge the onus of showing that he had not derived other undisclosed income had the consequence that he had failed to establish that the Commissioner's assessments of his assessable income were excessive. 93 Toohey J in Dalco said at 631: I agree with Wilcox J in the Federal Court that "the task for the taxpayer, upon an appeal or review under Pt V of the Act, is to show that the amount of money for which tax is levied by a particular notice of assessment exceeds the actual substantive liability of the taxpayer." As his Honour points out, a taxpayer will generally discharge that onus by satisfying the court or tribunal that his or her true taxable income is less than that appearing in the assessment. … A taxpayer does not necessarily discharge the onus of showing that an assessment is excessive, merely by showing that monies treated by the Commissioner as income are in truth not the income of the taxpayer, though that may be a step in demonstrating his or her taxable income to be less than the assessment. (Emphasis added) 94 Section 14ZZK was inserted into the TA Act (and s 190 of the ITAA repealed) by the Taxation Laws Amendment Act (No 3) 1991. However, that change in the location of the provision was not intended to alter its meaning. In the second reading speech for the Bill relating to that amendment, the Treasurer said: [26.40] The law in relation to limitation of the grounds of objection and the burden of proof, in proceedings before the AAT or the Federal Court, has not been altered from that which operated previously. For example, the effect of provisions such as s 190 of the ITAA, being repealed by this Bill, will continue. 95 The proposition that s 14ZZK(b)(i) requires a taxpayer on an appeal against an assessment to establish his or her true tax liability is settled. In Mulherin v Commissioner of Taxation [2013] FCAFC 115, the Full Court said at [42]: [T]he Tribunal did not err in law in stating that it is not enough for a taxpayer to show error in the Commissioner's assessment; the taxpayer must positively prove his or her "actual taxable income" and, in doing so, must show that the amount of money for which tax is levied by the assessment exceeds the actual substantive liability of the taxpayer … . Unless he does so, the taxpayer has not discharged the burden of proving the assessment is excessive. 96 Although the AAT referred to s 14ZZK and the burden of proof (at [6]), it did not address this aspect of its application, and did not make any finding as to whether Mr Moignard had discharged the onus of proof. Nor did the AAT make any finding as to Mr Moignard's actual tax liability. As noted earlier, the only order made by the AAT was to set aside "the objection decision under review". Prima facie, this means that the AAT failed to make its decision in accordance with the law. 97 Counsel for Mr Moignard sought to avoid this conclusion by a submission having the following elements: (a) Contrary to the Commissioner's supposition, the assessment of 4 April 2011 which was the subject of the objection was an amended assessment issued by the Commissioner under s 170(1) of the ITAA (which authorises the issue of amended assessments) and not a default assessment pursuant to s 167; (b) Section 14ZV of the TA Act applies to objections against amended assessments. It provides: 14ZV Limited objection rights in the case of certain amended taxation decisions If the taxation objection is made against a taxation decision, being an assessment or determination that has been amended in any particular, then a person's right to object against the amended assessment or amended determination is limited to a right to object against alterations or additions in respect of, or matters relating to, that particular. The combined effect of s 14ZV and 14ZZK was that, subject to a grant of leave by the AAT, Mr Moignard was confined to objecting against the particular alteration to the original assessment of 13 July 2010, or to matters relating to that particular alternation; (c) The AAT had not granted leave to him pursuant to s 14ZZK(a) to object on any wider basis; (d) Mr Moignard's onus of proof under s 14ZZK was informed by the limitations on his right to object imposed by s 14ZV, with the effect that he was relieved from the burden of establishing his true tax liability. 98 This submission led to a number of submissions at the hearing concerning the question of whether the initial assessment of 13 July 2010 was issued under s 166 or 167. In the joint supplementary submission, the Commissioner contended that, being dissatisfied with Mr Moignard's return, he had acted pursuant to s 167(5) of the ITAA in issuing the amended assessment under s 170 of the ITAA. The Commissioner also contended that s 167, properly understood, is supportive or facilitative of s 166 (George v Federal Commissioner of Taxation (1952) 86 CLR 183 at 203-204) so that distinctions between an assessment pursuant to s 166 and 167 are not helpful. 99 In my opinion, the resolution of the issues on the appeal does not require these matters to be addressed. The principal question raised by Mr Moignard's submission as just outlined is whether s 14ZZK(b)(i) has a different operation in relation to applications concerning assessments amended pursuant to s 170 than it does in relation to assessments pursuant to s 166 and, in particular, s 167. 100 Section 14ZZK refers to an application for review of "a reviewable objection decision". The term "reviewable objection decision" is defined in s 14ZQ to mean "an objection decision that is not an ineligible income tax remission decision". The reference to "an ineligible income tax remission decision" can be ignored for present purposes. An "objection decision" is a decision made by the Commissioner under s 14ZY(1), (1A) and (1B). None of those provisions draws a distinction between objections to assessments made pursuant to s 166, 167 or 170 of the ITAA. They do not provide a basis for an inference that the operation of s 14ZZK(b)(i) is modified in some way in respect of objections to amended assessments. 101 Further, in principle the limitation of the grounds upon which a taxpayer may object to an amended assessment should not affect a taxpayer's burden of establishing his or her true tax liability. The obligation on a taxpayer imposed by s 14ZZK(b)(i) to reveal any taxable income not previously disclosed to the Commissioner cannot reasonably be understood as being qualified by the limitation on the grounds of objection to the assessment in fact issued by the Commissioner, nor can the taxpayer's obligation to show that no portion of a total amount included by the Commissioner in the assessable income is properly assessable be so regarded. A contrary construction would be inconsistent with the object of s 14ZV. That object was described by Gordon J in Epov v Commissioner of Taxation [2007] FCAFC 139; (2007) 244 ALR 334 at [32]-[33]: [32] … In other words, if a taxpayer wished to object to an assessment, then he or she could do so. If they did not and the respondent served an amended assessment, the taxpayer's grounds of objection were limited to the specific items addressed in the amended assessment. The object of s 14ZV was to prevent a taxpayer treating the amended assessment as an assessment with unlimited rights of objection under Pt IVC of the [TA Act]. … [33] The fact that the taxpayer had limited rights to object against an amended assessment reflected the interaction between s 170(2) of the 1936 Act and Pt IVC of the [TA Act]. The 1936 Act permitted the respondent to amend the assessment to include "the addition of new items of income or the allowance of deductions not previously allowed" within prescribed time limits, and at the same time preserved the time limits imposed upon taxpayers to object to items included or excluded from their assessable income: see Pt IVC of the [TA Act]. The interaction of the 1936 Act and Pt IVC of the [TA Act] therefore imposed safeguards for the proper administration of the tax legislation for both the respondent and the appellant. 102 There may, I suppose, be circumstances in which a taxpayer may wish to raise, belatedly, a claim for additional deductions. Whether or not s 14ZV and s 14ZZK would preclude the taxpayer from doing so is something which does not have to be decided presently. The resolution of that question would have to take account of the AAT's power "to order otherwise" contained in s 14ZZK(a). If, despite s 14ZZK(a), a taxpayer is precluded from establishing additional deductions in the proof of the actual tax liability, that will be a consequence of the statutory provisions operating in accordance with their terms. It would not warrant a judicial revision of the plain and ordinary meaning of s 14ZZK. 103 The notion that s 14ZV modifies the onus of proof imposed by s 14ZZK on a taxpayer is also inconsistent with the decision of the High Court in Federal Commissioner of Taxation v Australia and New Zealand Savings Bank Limited (1994) 181 CLR 466 in which it was held that it is open to the Commissioner on an appeal against the disallowance of an objection to raise for the Court's determination the appropriateness of deductions allowed to the taxpayer in the Commissioner's assessment. It is not readily to be supposed that s 14ZV would preclude a taxpayer from objecting to something raised by the Commissioner. 104 Although by virtue of s 14ZZK(b)(i), a taxpayer has the burden in the AAT of showing his or her correct taxable income, it is possible for the parties to "agree to confine an appeal to a specific point of law or fact on which the amount of the assessment depends": Dalco at 624 (Brennan J) and 626-7 (Deane J). When that occurs, success by the taxpayer on the identified issue may be sufficient to indicate that the assessment is excessive. In their joint supplementary written submission, the parties said for the first time that there had been an "implied agreement" in the AAT that the review should be confined to the question of whether Mr Moignard's assessable income included the whole or any part of the net income of the RS/HoCT in the 2007-2008 year under s 97 or s 101 of the ITAA. 105 It seems surprising that neither the AAT nor this Court was informed of this implied agreement at the respective hearings, although the written submission in reply in this Court of the Commissioner had indicated that as a matter of law Mr Moignard did not have to establish that he had no other income. Nevertheless, it is appropriate to act on the basis of the parties' agreement. It means that Mr Moignard was not required to establish in the AAT that he did not derive any income from other sources in order to establish that the assessment was excessive, but he did have to establish that he did not at year end have a present entitlement to any of the income of the RS/HoCT for the 2007-2008 year. That was so whether the assessment to which he objected was made pursuant to s 166, 167 or 170. 106 For the reasons given earlier, I am satisfied that the Commissioner has made good his contention that the AAT erred in law by failing to determine whether Mr Moignard had discharged the burden imposed on him of establishing that his assessed tax liability in respect of the 2007-2008 year was excessive because it did not consider whether there had been a determination in respect of the whole of the income of the RS/HoCT in that year.